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Dr. Don Taylor, CFA, advice columnistInvesting money you're saving for a house

Dear Dr. Don,
My husband's new job is a transfer and we are relocating from Massachusetts to Ohio. We sold our primary residence for $400,000. We are planning to rent an apartment in Ohio, retire in five years, return to Massachusetts and purchase a new residence. We could buy a new home sooner if housing prices go down.

I am considering putting all $400,000 in four, one-year CDs earning about 5.5 percent. Should I be concerned that only $100,000 is FDIC insured? Is it safe to open a high rate certificate of deposit online? I'd welcome any other suggestions you might have on this investment.
-- Alex Accumulate
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Dear Alex,
It's so easy to work around the constraints of the FDIC insurance requirements that, in my mind, there's no particular reason not to have your deposits FDIC-insured. For example, a joint account at a bank can give each of you $100,000 in insurance coverage, assuming you have no other insured deposits at that bank. That means you could have $400,000 in coverage with two $200,000 joint accounts, as long as the two accounts are at different banks.

The FDIC guide, "Insuring Your Deposits," has more information about deposit insurance. (Don't forget that National Credit Union Share Insurance Fund, or NCUSIF-insured, shares at a credit union are also backed by the full faith and credit of the United States government.)

Bricks and mortar don't make a bank safe. Focus instead on the bank's safety rating. Bankrate publishes its Safe & Sound and CAEL ratings for banks, so you can see how a bank stacks up before sending it your money. Shop CD rates on Bankrate, and don't forget to check the bank's rating.

Another choice for your investment is a CDARS account, the Certificate of Deposit Account Registry Service. It's a CD product offered by select financial institutions that lets you have up to $25 million in FDIC insurance coverage while maintaining one banking relationship. A Bankrate feature, "CDARS: An easy way to beat $100,000 FDIC limit," has more information about CDARS.

I think your decision to keep your house money in insured CDs is a smart move, given your short investment horizon and uncertain timing as to when you would need the money. Don't forget to learn about each CD's early withdrawal penalty before investing. You don't want to lose that good yield by paying withdrawal penalties.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."'s corrections policy -- Posted: July 21, 2006
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